Bond Bulls Beware in Nomura Call to Heed Signs of U.S. Strength

  • Investors overlooking improved domestic data, Goncalves says
  • Benchmark note yield seen rising to 2% by end of March

Bond bulls may want to re-evaluate their stance before Friday’s U.S. employment report, according to George Goncalves of Nomura Securities Inc.

Treasury-market investors have been focusing too much on negative interest rates in Europe and Japan rather than improving U.S. economic data, said Goncalves, Nomura’s head of rates research. Traders who view negative rates as a sign of waning central-bank firepower have been too pessimistic about the global economic picture, in his view.

“The economic numbers haven’t been that off the mark, they’ve just been selectively ignored because everyone’s been obsessed with NIRP,” or negative interest-rate policy, Goncalves said in a phone interview.

Goncalves said investors lost sight of U.S. economic fundamentals during a February rally that took Treasury 10-year yields as low as 1.53 percent, the lowest since 2012. Treasuries tumbled on Tuesday by the most this year after a report on manufacturing exceeded forecasts in a sign U.S. economic resilience. The next stop for the benchmark note’s yield should be 2 percent by the end of March, he said. Federal Reserve policy makers meet March 15-16. 

Ten-year note yields fell one basis point, or 0.01 percentage point, to 1.83 percent as of 11:53 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security in February 2026 rose 1/8, or $1.25 per $1,000 face amount, to 98 6/32.

Data have been improving relative to economist forecasts, according to the Citigroup U.S. Economic Surprise Index. The index climbed to the highest since November on Wednesday, though it’s still negative, which indicates readings are falling short of economist projections.

Jobs Report

U.S. employers hired 195,000 workers in February, after adding 151,000 in January, based on a Bloomberg survey of economists before the government’s monthly employment report on Friday.

Goncalves said a report that aligns with or exceeds forecasts may prompt investors to rethink their outlook for Fed policy. Traders assign a 60 percent chance the Fed will raise interest rates this year, according to overnight-indexed swaps data compiled by Bloomberg. Futures prices don’t fully reflect another rate increase until March of next year, assuming the effective fed funds rate averages 0.625 percent after the next hike. Policy makers in December raised rates for the first time in almost a decade and signaled four increases this year.

“If we don’t get a recession and we continue to get mediocre growth, that doesn’t mean the end of the world, so why should U.S. rates go even lower?” he said. The Fed “should at least hike once this year, with the option for two.” He said the earliest the Fed will raise rates is June.

Term Premium

In a note to clients, he took issue with the argument that higher yields on U.S. debt make it attractive compared to securities in Germany, where 10-year notes yielded 0.18 percent Thursday, and Japan, where the government on Feb. 29 sold 10-year debt with a negative yield for the first time. That’s because currency hedging costs tend to rise as international investors bid up the cost of Treasuries, he said, which makes it tougher to earn a good return.

What’s more, the New York Fed’s gauge of term premium remains negative, meaning investors are effectively discounting the chance that inflation or interest rates rise more quickly than expected over the next decade.

The 10-year break-even rate, which is derived from the difference in yield between conventional Treasuries and inflation-linked debt, climbed for a 10th day, reaching the highest in almost two months. The gauge, which shows what traders expect inflation to average during the period, dropped last month to the least since 2009.

With “paltry coupon yields and thin buffer of cash flows to offset mark-to-market losses in the face of outsized market swings of late, investors may soon discover that government paper, especially the intermediate sector, may not be risk-free after all,” he wrote in the note.

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